Digital alternatives to cash are gaining traction – and could change the way the financial system works.
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There could be other economic benefits too. Globally, 1.7 billion people remain unbanked; CBDC accounts could be incorporated into mobile-phone wallets, boosting financial inclusion in emerging markets.
But how CBDCs impact monetary policy depends partly on whether they pay interest. If they replicate paper money there would be no yield – thus causing problems for central banks currently considering negative interest rates. Paying interest, however, would facilitate transmission of monetary policy into the wider economy.
But either way, the transaction data would allow central banks and governments to monitor their economies in real time and thus adapt policies – fiscal or monetary.
The Bank for International Settlements says 10 per cent of central banks claim to be likely to issue a CBDC within three years and 20 per cent within six. There are pilots in Ukraine, South Korea, Iceland and Thailand, while Canada, Brazil and Cambodia are working on ideas. The Bahamas’ card-based ‘Sand Dollar’ has already been tested on two islands.
In the large economies, Sweden’s Riksbank and the People’s Bank of China are furthest ahead in developing CBDCs and it seems likely that the proposals from at least one will become reality during 2021. Some other countries are much further behind, but once one central bank, anywhere in the world, finds a workable solution, adoption rates could rise very quickly.